Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

No 126: In Defense of Lawyers. Moral Hazard as an Aid to Cooperation

Karl Wärneryd ()
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Karl Wärneryd: Department of Economics, Postal: Stockholm School of Economics, Box 6501, 113 83 Stockholm, Sweden

Abstract: This paper studies strategic delegation in two-player contests for an indivisible prize (as in, e.g. litigation) where one party's probability of winning is determined by the relative investments of both. Even though neither player stands to gain anything from the possibility of one player committing himself to an investment level, both players ex ante prefer compulsory representation by agents (e.g. lawyers) whose efforts are unobservable. Thus this paper points out a role for delegation with moral hazard in facilitating cooperation.

Keywords: Strategic delegation; contests; moral hazard; lawyer-client relationship

JEL-codes: C72; D72; D82; K41

11 pages, September 1996

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